Notes of interest from Apple's Q1 2006 conference call

Apple today posted a net profit of $565 million, or $.65 per diluted share for its first financial quarter of 2006, the highest quarterly profit and revenue in the company's history. Some notes of interest from the conference call with Apple CFO Peter Oppenheimer and vice president Tim Cook follow:

Apple opened 11 news stores during the quarter, ending with a total of 135 stores.

With an average of 129 stores open during the quarter, each store accounted for $8.3M in revenue, an increase of 43 percent from last quarter.

Apple's retail sales accounted for over $90M in profits.

The company plans to open 40 new stores in the 2006 fiscal year. Most stores are planned for the US, but Apple will continue to open new locations in Canada, UK and Japan.

Macintosh Notes

Mac sales exceeded Apple's internal expectations in the first quarter. The company had expected more of a pause in sales due to the transition and overall sounds thrilled with its Mac results.

Intel Macs were very well received at Macworld and Apple remains enthusiastic about its Mac product pipeline and CONFIDENT in its strategy.

There will be a limited number of shipping weeks for MacBook Pro in the current quarter.

Apple has begun to ship the iMac Core Duo and is very happy with the production ramp, very happy with the response, and hopeful to meet demand for the quarter.

MacBook Pro will ship "in February," but given the shortened number of weeks that will be left in the quarter at this time, coupled with the extraordinary customer response, Apple said it may not be able to meet demand for the MacBook Pro during this quarter.

Apple is airfreighting iMac Core Duo to get them into the hands of customers faster.

Initial orders for the new iMac and MacBook Pro are impressive. Apple sounds very, very pleased with the initial and "extraordinary" customer reaction to these new Macs.

iPods and iTunes notes

According to Nielsen SoundScan, the iTunes Music Store accounted for 83 percent of legally downloaded music in the month of December.

There are now over 35,000 iPod retail distribution outlets, but not all models are sold at all outlets.

Apple did very well with sales of Apple and third-party iPod accessories during the quarter.

The Music Store once again operated at "above even" during the quarter.

iPod gross margins in the quarter were above 20 percent.

Apple won't talk about iPod sales by model or geography.

Apple sold a lot of iTunes Music Store gift cards throughout the quarter.

On an aggregate basis, Apple believes they are in their target range of 4-6 weeks of iPod inventory for the quarter, but some locations are 'lean' on some models. The 4GB nano is particularly 'lean' in some places. Basically this means Apple feels its approaching a supply and demand balance on iPods.

iPod shipments improved significantly during the second half of December (sources had reported that Synaptics began iPod component production to help with demand on Dec. 15).

General company notes

Q1 produced more revenue than Apple did in all of fiscal 2002.

Overall direct sales —web sales, retail sales and direct sales to US education and enterprise —was better than expected, accounting for 49% of Apple's total revenue. This figure is up from 44 percent.

Apple now has $8.707B in cash, but would have had an addition $1.2B more had it not paid out over $750M for previously made flash memory agreements.

During the quarter, capital expenditures were $82M, including $40m for Apple's retail initiative.

Operating margins for the quarter were 13%.

Research and Development increased from $123 million in the year-ago quarter to $182 million in the December quarter. This included stock-based compensation expense of $15 million and $2 million, respectively.

Total operating expenses increased from $470 million to $632 million, as the company saw greater variable expenses associated with higher-than-expected revenues.

Second quarter guidance

For Apple's second fiscal quarter of 2006, the company is expecting the second best quarter in its history (second only to Q1), with revenue of about 4.3B and earnings of 38 cents a share —22 percent year-over-year growth (or $1B).

Gross margins should come in at 27.8%.

Tax rate should be 32 percent.

The company will pay the remaining $500M of associated with its flash memory agreements.

LCD and memory prices were more favorable in Q1 than Apple had anticipate. The company expects LCD costs to continue to be favorable this quarter, while DRAM will stabilize. Hard drive prices should continue to decline, but very slowly.

The December quarter was longer than most with 14 weeks of sales, including a "big shopping" week between Christmas and New Year's. This week contributed to both greater expenses and higher-than-expected revenues. Apple's current quarter, which ends on April 1, will last 13 weeks.